Climate Reporting: Lessons Learned from 2024 UK TCFD Reporting and What Lies Ahead

The financial sector continues to respond to a myriad of sustainability-related disclosure regulations, which are pushing climate risk and other Environmental, Social, and Governance (‘ESG’) data into the market for investor consumption. In the UK, 30 June 2024 marked the second year for large asset managers and asset owners to publish entity and product-level Task Force on Climate-related Financial Disclosures (‘TCFD’), whilst small asset management firms (i.e. below £50bn AUM) issued their initial disclosures on forward and backward-looking climate-related metrics. Here are a few of the key insights and changes from this second reporting cycle and as well as some critical changes that are on the horizon for firms reporting against TCFD.

In the second year of TCFD reporting, asset managers (>£50bn AUM) and asset owners (>£25bn AUM) in scope have opted to enhance their previous reports rather than making substantial changes. We have analysed a selection of TCFD product reports from 14 large-sized asset managers – initial observations highlight a few interesting trends:

Reports’ Readability:

• Most product reports’ lengths remained roughly the same size and level of detail, averaging 12 pages per report.
• Few managers made notable changes to enhance readability e.g. reducing the number of graphs or tables.
• Firms in the second year of reporting added year-on-year comparisons, which led to a large number of metrics to be displayed, increasing the complexity of the data displayed in the reports.
• Narratives remained broadly untouched from their year one reporting, with changes focusing primarily around year-on-year comparison commentary.

Metrics and Coverage:

• 15% of firms reviewed introduced new metrics in their reports, for example with a section on Net Zero Investment Framework (‘NZIF’) classification or including the number of portfolio holdings with Science Based Targets initiative (‘SBTi’) targets in place.
• This year saw the inclusion of greater Scope 3 emissions reporting (which became a mandatory requirement).
• More than 60% of product reports included Scope 3 emissions in their Carbon Footprint and Weighted Average Carbon Intensity (‘WACI’) calculations.
• Some firms included two versions: one considering Scope 1+2 and another Scope 1+2+3 in the numerator. This seems to signal firms’ interest in driving greater adoption and inclusion of Scope 3 data point whilst acknowledging that metrics coverage is likely to be impacted in the short-term due to lower coverage levels of Scope 3 data.

Data Providers:

• We noted no significant changes to the data providers used by firms, with most referencing the use of at least one data provider (typically MSCI) to support their backward-looking metrics disclosures.
• All reports retained a fair amount of caveats around data gaps and limitations, which applied even more in regards to scope 3 disclosures.

Methodology Consistency:

• All reports retained the same coverage calculation methodology (either disclosing a split of reported and estimated coverage or a combined number).
• Additionally, we noted that no asset managers had adjusted (e.g. added to) the asset classes included within the scope of their metrics’ calculations.

Reports’ Location:

• Only 20% of peers have maintained a webpage as a repository of all their TCFD reports, making them easier to find. Given that ease of access for clients to TCFD reporting was highlighted by the FCA as an important consideration, this could inevitably prove to be problematic for some firms.

The Financial Stability Board (‘FSB’), which originally oversaw TCFD, has now transitioned the ownership of its monitoring activities to the International Financial Reporting Standards (‘IFRS’) Foundation who published the inaugural International Sustainability Standards Board (‘ISSB’) Standards (IFRS S1 and IFRS S2).

The ISSB has made considerable strides in standardising ESG (incl. TCFD) reporting, but there is still much work to be done. Key areas of focus include:

• Global Adoption: ISSB standards should be adopted globally with minimal modifications to ensure consistency across countries. This consistency is crucial for comparable and reliable ESG data.
• Foundational Data: Increasing the availability of foundational data is essential. Initiatives like Bloomberg’s Proof of Concept on Net Zero Data Public Utility (‘NZDPU’) are expanding the amount of data accessible to organisations, which could help financial institutions and investors better assess their emissions and improve the quality of disclosures.
• Transition Plans: Including information about transition plans in databases will be an important next step. This will provide a clearer picture of how companies plan to achieve their sustainability goals and align with net-zero targets. ISSB doesn’t require organisations to provide a transition plan but if they have one then organisations should report on it.

The updates from TCFD and ISSB reflect a growing commitment to improving climate reporting within the asset management sector. While significant progress has been made, particularly in integrating Scope 3 emissions and enhancing data availability, there is still a need for more streamlined, readable, and actionable reports. TCFD disclosure reporting will also be relevant for reporting under ISSB once transposed into UK legislation and for broader corporate reporting in due course under CSRD.

For firms subject to TCFD disclosure reporting, here are a few actions that managers should still be considering beyond TCFD go-live:

• Examine what your peers have done in terms of reporting and see how your reports align to your competitors.
• Consider what additional data points would be helpful to your next year’s reports (potentially to start covering recommendations from other regulations).
• Define proper ownership now that TCFD is moving into BAU for most firms.